See accompanying notes to condensed consolidated unaudited financial statements
See accompanying notes to condensed consolidated unaudited financial statements
See accompanying notes to condensed consolidated unaudited financial statements
Yunhong CTI Ltd. (formerly CTI Industries Corporation) and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed (a) consolidated balance sheet as of December 31, 2018, which has been derived from audited consolidated financial statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared and, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the consolidated financial position and the consolidated statements of comprehensive income and consolidated cash flows for the periods presented in conformity with generally accepted accounting principles for interim consolidated financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2018.
Principles of consolidation and nature of operations:
The condensed consolidated financial statements include the accounts of Yunhong CTI Ltd. (formerly CTI Industries Corporation) and its wholly-owned subsidiaries, CTI Balloons Limited and CTI Supply, Inc., its majority-owned subsidiaries, Flexo Universal, S. de R.L. de C.V. and CTI Europe gmbH, as well as the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C and Clever Container Company, L.L.C. (the “Company”). The last three entities have been consolidated as variable interest entities. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributes balloon and related novelty (candy and party related) products throughout the world, (ii) operates systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products, and (iii) distributes vacuum sealing products and home organization products in the United States. We have announced our intention to divest our interest in Clever Container and deconsolidate that entity from our group. As we are still the entity most closely associated with Clever Container in our related party group as of March 31st, 2019 it remains consolidated as a variable interest entity.
Variable Interest Entities (“VIEs”):
The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. There are three entities that have been consolidated as variable interest entities.
Use of estimates:
In preparing condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting period in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include reserves for doubtful accounts, reserves for the lower of cost or market of inventory, reserves for deferred tax assets and recovery value of goodwill.
Earnings per share:
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period.
Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.
As of March 31, 2019 and 2018, shares to be issued upon the exercise of options and warrants aggregated 471,144 for each period. The number of shares included in the determination of earnings on a diluted basis for the three months ended March 31, 2019 and 2018 were none, as doing so would have been anti-dilutive.
Significant Accounting Policies:
The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2018. There were no significant changes to these accounting policies during the three months ended March 31, 2019, except for the adoption of Accounting Standards Codification (ASC) Topic 842, Leases.
On January 1, 2019, we adopted ASC Topic 842 (Leases). The adoption of this standard significantly increased our assets and liabilities and further discussed in Note 12. ASC 842 requires a lessee to recognize assets and liabilities related to leases with terms in excess of 12 months. Such assets are typically considered Right-Of-Use (“ROU”) assets. Prior information has not been restated and continues to be reported under the accounting standards in effect for those periods.
On January 1, 2018, we adopted ASC 606 (Revenue From Contracts With Customers) using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606.
The Company provides for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
Auditor Replacement Process:
During April 2019, our independent registered accounting firm, Plante & Moran PLLC, declined to stand for reappointment as auditor. As of January 3rd, 2020, the Audit Committee of the Board approved the engagement of RBSM, LLP (“RBSM”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ended December 31st, 2019. Previously, the quarterly report on Form 10-Q was prepared without the benefit of auditor review. This Form 10-Q/A is filed with review from RBSM.
Prior Period Reclassification
Certain amounts in prior periods have been reclassified to conform with current period presentation and had no effect on prior period net loss or stockholders’ equity.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02 Leases (Topic 842), also referred to as “ASC 842” or “New Lease Standard”, which supersedes ASC 840 Leases (Topic 840), and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The FASB has continued to clarify this guidance through the issuance of additional ASUs. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less may be accounted for similar to existing guidance for operating leases. ASC 842 was effective for the Company for the year ending December 31, 2019. We reported our financial information for fiscal years ending before December 31, 2018 under the Topic 840 lease accounting standard. The Company applied the modified retrospective transition method and elected the transition option to use the effective date of January 1, 2019 as the date of initial application. The Company recognized the cumulative effect of the transition adjustment as of the effective date and will not provide any new lease disclosures for periods before the effective date. The Company elected the package of practical expedients and did not elect the use of the hindsight practical expedient. As a result, the Company will, in effect, continue to account for existing leases as classified in accordance with ASC 840, throughout the entire lease term, including periods after the effective date, with the exception that the Company will apply the new balance sheet recognition guidance for operating leases and apply ASC 842 for remeasurements and modifications after the transition date.
Other key practical expedients elected by the Company (as a lessee) relate to maintaining leases with an initial term of 12 months or less off the balance sheet; not separating lease and non-lease components and the use of the portfolio approach to determine the incremental borrowing rate. For transition purposes, the Company used the incremental borrowing rate based on the total lease term and total minimum rental payments. The Company completed its identification of leases which comprised two building leases and two equipment leases. Further, the Company analyzed service contracts and parts assembly arrangements from suppliers and did not identify any material leases of production equipment. On the date of initial application, the Company recognized right-of-use ("ROU") assets and leasing liabilities on its condensed consolidated balance sheets of approximately $2.8 million. The adoption had no significant impact on the Company's condensed consolidated statement of operations.
Note 2 – Liquidity and Going Concern
The Company’s primary sources of liquidity are cash and cash equivalents as well as availability under the Credit Agreement with PNC Bank, National Association (“PNC”) (see Note 3). As indicated in Note 3, twice during 2018 we violated covenants in our credit facility and as of March 2019 we entered into a forbearance agreement with PNC. Under the terms of this agreement, financial covenants as of March 31, 2019 will not be considered and all previously identified compliance failures will be waived, but we remain out of compliance with the terms of our credit facility, as amended.
In addition to the above, due to financial performance in 2016, 2017 and 2018, including net income/(losses) attributable to the Company of $0.7 million, ($1.6 million), and ($3.6 million), respectively, we believe that substantial doubt about our ability to continue as a going concern exists at March 31, 2019.
Additionally, we have experienced challenges in maintaining adequate seasonal working capital balances, made more challenging by increases in financing and labor costs. These changes in cash flows have created strain within our operations and have therefore increased our desire to incorporate additional funding resources.
Management’s plans include:
(1) Pursuing a strategically significant major capital event.
(2) Working with our bank to resolve our compliance failure on a long-term basis.
(3) Evaluating and potentially executing a sale/leaseback transaction of our facility in Lake Barrington, IL.
(4) Continuing to monitor the equity market for the potential to complete the transaction attempted during 2018, and
(5) Exploring alternative funding sources.
Management Assessment
Considering both quantitative and qualitative information, we continue to believe that our plans to obtain additional financing will provide us with an ability to finance our operations through 2019 and, if adequately executed, will mitigate the substantial doubt about our ability to continue as a going concern.
Note 3 - Debt
During December 2017, we terminated a prior credit arrangement and entered in new financing agreements with PNC Bank, National Association (“PNC”). The “PNC Agreements” include a $6 million term loan and an $18 million revolving credit facility, with a termination date of December 2022.
Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at Yunhong CTI, LTD (U.S.) and Flexo Universal (Mexico). We notified PNC of our failure to meet two financial covenants as of March 31, 2018. On June 8, 2018, we entered into Waiver and Amendment No. 1 (the “Amendment 1”) to our PNC Agreements. The Amendment modified certain covenants, added others, waived our failure to comply as previously reported, and included an amendment fee and temporary increase in interest rate. During September 2018, we filed a preliminary prospectus on Form S-1 for a planned equity issuance. On October 8, 2018, we entered into Consent and Amendment No. 2 (the “Amendment 2”) to our PNC Agreements. Amendment 2 reduced the amount of new funding proceeds that must be used to repay the term loan from $5 million to $2 million and waived the calculation of financial ratios for the period ended September 30, 2018, in exchange for a new covenant committing to raise at least $7.5 million in gross proceeds from our equity issuance by November 15, 2018 and pay an amendment fee. Market conditions ultimately forced us to postpone the offering, and thus no proceeds were received by the November 15, 2018 requirement.
We engaged PNC to resolve this failure to meet our amended covenant, and as of March 2019 entered into a forbearance agreement. Under the terms of this agreement, previously identified compliance failures will be waived and financial covenants as of March 31, 2019 will not be considered, with the next calculation due for the period ending June 30, 2019. We received a temporary over-advance of $1.2 million, which declined to zero over a six-week period under the terms of this agreement and paid a fee of $250,000. As forbearance is a temporary condition and we remain out of compliance with the terms of our facility, we have reclassified long-term bank debt to current liabilities on our balance sheet.
Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at Yunhong CTI, LTD (U.S.) and Flexo Universal (Mexico).
Certain terms of the PNC Agreements include:
|
●
|
Restrictive Covenants: The Credit Agreement includes several restrictive covenants under which we are prohibited from, or restricted in our ability to:
|
|
o
|
Borrow money;
|
|
o
|
Pay dividends and make distributions;
|
|
o
|
Make certain investments;
|
|
o
|
Use assets as security in other transactions;
|
|
o
|
Create liens;
|
|
o
|
Enter into affiliate transactions;
|
|
o
|
Merge or consolidate; or
|
|
o
|
Transfer and sell assets.
|
|
●
|
Financial Covenants: The Credit Agreement includes a series of financial covenants we are required to meet including:
|
|
o
|
We are required to maintain a "Leverage Ratio", which is defined as the ratio of (a) Funded Debt (other than the Shareholder Subordinated Loan) as of such date of determination to (b) EBITDA (as defined in the PNC Agreements) for the applicable period then ended. The highest values for this ratio allowed by the PNC Agreements are:
|
Fiscal Quarter Ratio
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
4.75
|
to
|
1.00
|
|
March 31, 2018
|
4.50
|
to
|
1.00
|
|
June 30, 2018
|
4.25
|
to
|
1.00
|
|
September 30, 2018
|
not applicable
|
|
December 31, 2018
|
3.50
|
to
|
1.00
|
|
March 31, 2019
|
not applicable
|
|
June 30, 2019
|
3.00
|
to
|
1.00
|
|
September 30, 2019 and thereafter
|
2.75
|
to
|
1.00
|
|
|
o
|
We are required to maintain a "Fixed Charge Coverage Ratio", which is defined as the ratio of (a) EBITDA for such fiscal period, minus Unfinanced Capital Expenditures made during such period, minus distributions (including tax distributions) and dividends made during such period, minus cash taxes paid during such period to (b) all Debt Payments made during such period. This ratio must not exceed 1.1 : 1.0 for any quarterly calculation.
|
The credit agreement provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. We also entered into a swap agreement with PNC Bank to fix the rate of interest for $3 million of the notes over 3 years at 2.25%. This contract was made at market value upon December 14, 2017 execution and accounted for as a hedge. This contract is expected to terminate during 2019 at no cost or benefit to the Company under the terms of the forbearance agreement.
Failure to comply with these covenants has caused us to pay a higher rate of interest (by 2% per the Agreements), and other potential penalties may impact the availability of the credit facility itself, and thus might negatively impact our ability to remain a going concern. As described above in this Note as well as in Note 2, we were not in compliance with this credit facility as of December 31, 2018 and have entered into a forbearance agreement with our bank as of March 2019.
As of December 2017, Mr. Schwan was owed a total of $1,099,000, with additional accrued interest of $400,000, by the Company. As part of the December 2017 financing with PNC, Mr. Schwan executed a subordination agreement related to these amounts due him, as evidenced by a related note representing the amount owed to Mr. Schwan. During January 2019, Mr. Schwan converted $600,000 of his balance into approximately 181,000 shares of our common stock at the then market rate. No payments were issued to Mr. Schwan during 2018 or the three months ended March 31, 2019, with $15,000 of interest recorded as an expense.
Note 4 - Stock-Based Compensation; Changes in Equity
The Company has adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their grant-date fair values.
The Company has applied the Black-Scholes model to value stock-based awards and issued warrants related to notes payable. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 0%, as the Company did not issue dividends during 2019 and 2018. The expected volatility is based on historical volatility of the Company’s common stock.
The Company’s net loss for the three months ended March 31, 2019 and 2018 includes approximately $29,000 and $62,000, respectively, of compensation costs related to share based payments. As of March 31, 2019, there is $164,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $63,000 of additional stock-based compensation expense to be recognized over the remainder of 2019, and $56,000 to be recognized during 2020.
On April 10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan and subsequent awards categorized as inducement of employment authorized the issuance of up to 510,000 shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) On June 8, 2018, our shareholders approved the 2018 Stock Incentive Plan (“2018 Plan”). The 2018 Plan authorizes the issuance of up to 300,000 shares of our common stock in the form of equity-based awards. As of March 31, 2019, options for 471,144 shares remain outstanding.
A summary of the Company’s stock option activity, which includes grants of restricted stock, non-qualified stock options, incentive stock options, warrants and related information, is as follows:
|
|
Shares under
Option
|
|
|
Weighted Average
Exercise Price
|
|
Balance at December 31, 2018
|
|
|
471,144
|
|
|
$
|
3.95
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised/Issued
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2019
|
|
|
471,144
|
|
|
$
|
3.95
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2019
|
|
|
165,264
|
|
|
$
|
4.05
|
|
The instruments above have an aggregate intrinsic value of $78,000, which represents the total pre-tax intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended March 31, 2019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on March 31, 2019.
As described in Note 5, we issued 20,000 shares of common stock to Gary Page in a legal settlement during January 2019. The value of those shares on the date of issuance was approximately $67,000.
On January 11, 2019, the Company and its Chairman, Mr. John Schwan, completed an exchange debt for equity upon receipt of consent for the transaction from the Company’s lender. Mr. Schwan surrendered $600,000 in notes from the Company in exchange for 180,723 shares of the Company’s common stock. The value was set at the $3.32 per share closing price of the Company’s common stock on the NASDAQ stock market on December 20, 2018.
Note 5 - Legal Proceedings
The Company may be party to certain lawsuits or claims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, we do not believe any of these proceedings will have, individually or in the aggregate, a material adverse effect upon our financial condition, cash flows or future results of operation.
In July 2017, God’s Little Gift, Inc. (dba) Helium and Balloons Across America and Gary Page (“Claimants”) filed an action against the Company based on disputed compensation amounts over several years. This action was resolved by mutual agreement between the parties during January 2019. Mr. Page received 20,000 shares of CTI common stock, $5,000 in cash, and a minimum payout in his monthly royalty calculation of $7,667 beginning March 1, 2019 and ending August 1, 2021. The Company accrued the $0.3 million in committed costs under this settlement in its December 31, 2018 financial statements.
Note 6 - Other Comprehensive Income
In the three months ended March 31, 2018, the Company incurred other comprehensive income of approximately $236,000, all from foreign currency translation adjustments.
The following table sets forth the accumulated balance of other comprehensive income and each component.
|
|
Foreign Currency Items
|
|
|
Total
Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as of January 1, 2019
|
|
$
|
(6,050,347
|
)
|
|
$
|
(6,050,347
|
)
|
|
|
|
|
|
|
|
|
|
Current period change, net of tax
|
|
|
235,876
|
|
|
|
235,876
|
|
|
|
|
|
|
|
|
|
|
Ending Balance as of March 31, 2019
|
|
|
(5,814,471
|
)
|
|
|
(5,814,471
|
)
|
Note 7 - Inventories, Net
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Raw materials
|
|
$
|
2,402,974
|
|
|
$
|
1,994,741
|
|
Work in process
|
|
|
3,133,953
|
|
|
|
3,052,224
|
|
Finished goods
|
|
|
15,239,946
|
|
|
|
14,934,581
|
|
In Transit
|
|
|
451,588
|
|
|
|
480,716
|
|
Allowance for excess quantities
|
|
|
(390,554
|
)
|
|
|
(454,774
|
)
|
Total inventories
|
|
$
|
20,837,907
|
|
|
$
|
20,007,488
|
|
Note 8 - Geographic Segment Data
The Company has determined that it operates primarily in one business segment that designs, manufactures and distributes film and film related products for use in packaging, storage and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company's operations by geographic area is as follows:
|
|
Net Sales to Outside Customers
For the Three Months Ended
|
|
|
Total Assets at
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
8,760,000
|
|
|
$
|
9,738,000
|
|
|
$
|
23,472,000
|
|
|
$
|
25,354,000
|
|
Europe
|
|
|
1,275,000
|
|
|
|
1,362,000
|
|
|
|
3,366,000
|
|
|
|
3,052,000
|
|
Mexico
|
|
|
2,081,000
|
|
|
|
2,186,000
|
|
|
|
11,406,000
|
|
|
|
9,476,000
|
|
United Kingdom
|
|
|
420,000
|
|
|
|
693,000
|
|
|
|
1,461,000
|
|
|
|
879,000
|
|
|
|
$
|
12,536,000
|
|
|
$
|
13,979,000
|
|
|
$
|
39,705,000
|
|
|
$
|
38,761,000
|
|
Note 9 - Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. During the three months ended March 31, 2019 and 2018, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales, respectively. Sales to these customers for the three months ended March 31, 2019 and 2018 are as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Customer
|
|
Net Sales
|
|
|
% of Net Sales
|
|
|
Net Sales
|
|
|
% of Net Sales
|
|
Customer A
|
|
$
|
3,861,000
|
|
|
|
30.8
|
%
|
|
$
|
4,450,000
|
|
|
|
31.8
|
%
|
Customer B
|
|
$
|
2,159,000
|
|
|
|
17.2
|
%
|
|
$
|
2,471,000
|
|
|
|
17.7
|
%
|
As of March 31, 2019, the total amounts owed to the Company by these customers were approximately $2,933,000 or 29%, and $2,279,000 or 22%, of the Company’s consolidated net accounts receivable, respectively. The amounts owed at March 31, 2018 by these customers were approximately $3,643,000 or 33%, and $2,657,000 or 24% of the Company’s consolidated net accounts receivable, respectively.
Note 10 - Related Party Transactions
Stephen M. Merrick, Chief Executive Officer of the Company, is of counsel to the law firm of Vanasco Genelly and Miller PC which used to provide legal services to the Company. Legal fees paid by the Company to this firm for the three months ended March 31, 2019 and 2018, respectively, were none and $72,000.
John H. Schwan, through an investment entity, and Stephen M. Merrick, Chief Executive Officer of the Company, also through an investment entity own, in aggregate, a 50% interest in Clever Container Company L.L.C., an Illinois limited liability company (“Clever Container”). During the three months ended March 31, 2019 and 2018, Clever Container purchased various products from the Company in the amount of $62,000 and $237,000, respectively. As of March 31, 2019 and 2018, the balance of accounts receivable from Clever Container to the Company were $1,373,000 and $1,102,000, respectively.
Note 11 - Derivative Instruments; Fair Value
The Company accounts for derivative instruments in accordance with U.S. GAAP, which requires that all derivative instruments be recognized on the balance sheet at fair value. We may enter into interest rate swaps to fix the interest rate on a portion of our variable interest rate debt to reduce the potential volatility in our interest expense that would otherwise result from changes in market interest rates. Our derivative instruments are recorded at fair value and are included in accrued liabilities of our consolidated balance sheet. Our accounting policies for these instruments are based on whether they meet our criteria for designation as hedging transactions, which include the instrument’s effectiveness, risk reduction and, in most cases, a one-to-one matching of the derivative instrument to our underlying transaction. As of March 31, 2019 and December 31, 2018, we had one derivative instrument accounted for as a hedge, with the same instrument accounted for as a hedge as of March 31, 2018. Gains and losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized in the consolidated statement of operations. We have no such derivative financial instruments as of December 31, 2018. Changes in fair value for the respective periods were recognized in the consolidated statement of operations.
The interest rate swap we entered into December 14, 2017 had a three year term (ending December 14, 2020) and a notional amount of $3 million. The Company purchased a 2.25% fixed rate in exchange for the variable rate on a portion of the notes payable under the PNC Agreements, which was 1.47% at time of execution. The fair value of the swap was insignificant as of March 31, 2018 and December 31, 2018 and March 31, 2019. It is expected that this instrument will be eliminated with no gain or loss to the Company as a result of the forbearance agreement entered into during March 2019.
Note 12 - Leases
We adopted ASC Topic 842 (Leases) on January 1, 2019. This standard requires us to record certain operating lease liabilities and corresponding right-of-use assets on our balance sheet. Results for periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. We elected the package of practical expedients available for expired or existing contracts, which allowed us to carryforward our historical assessments of whether contracts are (or contain) leases, as well as lease classification tests and treatment of initial direct costs. We also elected to not separate lease components from non-lease components for all fixed payments, and we exclude variable lease payments in the measurement of right-of-use assets and lease obligations.
Upon adoption of ASC 842 we recorded a $2.8 million increase in other assets, a $1.3 million increase in current liabilities, and a $1.5 million increase in non-current liabilities. We did not record any cumulative effect adjustments in opening retained earnings, and adoption of ASC 842 had no impact on cash flows from operating, investing, or financing activities.
We determine if an arrangement is a lease at inception. Most of our operating leases do not provide an implicit rate of interest so we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. We lease various assets in the course of ordinary business including: warehouses and manufacturing facilities, as well as vehicles and equipment used in our operations. Leases with an initial term of 12 months or less are not recorded on the balance sheet as we recognize lease expense for these leases on a straight-line basis over the lease term. The depreciatable life of assets and related improvements are limited by the expected lease term, unless there is a reasonably certain expected transfer or title or purchase option. Some lease agreements include renewal options at our sole discretion. Any guaranteed residual value is included in our lease liability. The amortizable lives of operating and financing leased assets are limited by the expected lease term. The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating and financing lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralize basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for leases that commenced prior to that date.
The table below describes our lease position as of March 31, 2019:
Assets
|
|
As of March 31, 2019
|
|
Operating lease right-of-use assets
|
|
|
$2,839,000
|
|
Accumulated amortization
|
|
|
(361,000
|
)
|
Net lease assets
|
|
|
2,478,000
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating
|
|
|
1,301,000
|
|
Noncurrent
|
|
|
|
|
Operating
|
|
|
1,177,000
|
|
Total lease liabilities
|
|
|
2,478,000
|
|
|
|
|
|
|
Weighted average remaining term (years) – operating leases
|
|
3 years
|
|
|
|
|
|
|
Weighted average discount rate – operating leases
|
|
|
11.25
|
%
|
During the three months ended March 31, 2019, we recorded expenses related to
Operating right-of-use lease asset amortization
|
|
|
$361,000
|
|
|
|
|
|
|
Total expense for three months ended March 31, 2019
|
|
|
361,000
|
|
Operating lease expense were approximately $379,000 for the three months ended March 31, 2019. Operating lease costs are included within selling, general and administrative expenses on the condensed consolidated statements of operations. The Company does not have any finance leases. Cash paid for amounts included in the measurement of operating lease liabilities were approximately $361,000 for the three months ended March 31, 2019.
The following table summarizes the maturities of our lease liabilities for all operating leases as of March 31, 2019
|
|
|
(in thousands)
|
03/31/2019
|
2019
|
$1,210
|
2020
|
724
|
2021
|
757
|
2022 and thereafter
|
167
|
Total lease payments
|
2,858
|
less: Imputed interest
|
(380)
|
Present value of lease liabilities
|
$2,478
|
Note 13 - Summary of Subsequent Events
In July of 2019 management and the Board engaged in a review of the Company’s international subsidiaries and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the board authorized management to divest of all international subsidiaries. The Company divested its United Kingdom subsidiary in the fourth quarter 2019 and expects to divest its European (German) and Mexican subsidiaries in the first half of 2020. The operations of these entities will be presented as discontinued operations in the third quarter 2019, the period in which they met the accounting criteria for discontinued operations. These actions are being taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based in the United States. In October 2019, we determined that we would not renew our Trademark License Agreement with SC Johnson when it expired on December 31, 2019. Under this Agreement, we were licensed to manufacture and sell a line of vacuum sealing machines and pouches under the Ziploc® Brand Vacuum Sealer System. The terms of the Agreement included a run-off provision which allowed us to sell products under the Ziploc® trademark for 90 days after the end of the Agreement. For the three months ended March 31, 2019, we had revenue of $2.2 million associated with products which utilized the Ziploc® trademark. Our exit of the Ziploc® product line is considered a strategic shift and will have a major effect on our operations and financial results on a go forward basis. However, as we continued to utilize the Ziploc® related assets in 2020, those assets will not be considered abandoned until they cease to be used at the end of the first quarter of 2020. Therefore, our Ziploc® operations cannot be classified as discontinued operations in these financial statements but will be presented as discontinued operations when all of the applicable accounting criteria are met. We have also dramatically changed our capital structure. On January 3, 2020 we entered into a securities purchase agreement, as amended on February 24, 2020 and April 13, 2020, (the “LF Purchase Agreement”) with LF International Pte., a Singapore private limited company (the “LF International”), which is controlled by Company director Mr. Yubao Li, pursuant to which the Company agreed to issue and sell, and LF International agreed to purchase, up to 500,000 shares of the Company’s newly created Series A Convertible Preferred Stock (“Series A Preferred”), with each share of Series A Preferred initially convertible into ten shares of the Company’s common stock, at a purchase price of $10.00 per share, for aggregate gross proceeds of $5,000,000 (the “LF International Offering”). As a result of the LF International Offering, a change of control of the Company may occur. As permitted by the LF Purchase Agreement, the Company may, in its discretion issue up to an additional 200,000 shares of Series A Preferred for a purchase price of $10.00 per share to additional investors (the “Additional Shares Offering,” and collectively with the LF International Offering, the “Offering”). On January 13, 2020, the Company conducted its first closing of the LF International Offering, resulting in aggregate gross proceeds of $2,500,000. Pursuant to the LF Purchase Agreement, LF International received the right to nominate and elect one member to the Company’s board of directors (subject to certain adjustments), effective as of the first closing, as well as a second director by the earlier of (i) the Company’s upcoming 2020 annual meeting of shareholders and (ii) May 15, 2020 and a third director by the Company’s upcoming 2020 annual meeting of shareholders. Pursuant to LF International’s nomination, effective January 13, 2020, the Board appointed Mr. Yubao Li as a director of the Company. Additionally, pursuant to the LF Purchase Agreement, on March 12, 2020, the Company changed its name to Yunhong CTI Ltd. To date, the Company has sold 492,660 shares of Series A Preferred to LF International and other accredited investors for aggregate gross proceeds of $4,926,600. Additionally, on April 1, 2020, an investor converted an accounts receivable of $482,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred. Our business and results of operations may be negatively impacted by the spread of COVID-19. We sell our products throughout the United States and in many foreign countries and may be impacted by public health crises beyond our control. This could disrupt our operations and negatively impact sales of our products. Our customers, suppliers and distributors may experience similar disruption. In December 2019, COVID-19 was reported in Wuhan, China. The World Health Organization has since declared the outbreak to constitute a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our customers and employees, all of which are uncertain and cannot be predicted. The preventative and protective actions that governments have taken to counter the effects of COVID-19 have resulted in a period of business disruption, including delays in shipments of products and raw materials. To the extent the impact of COVID-19 continues or worsens, the demand for our products may be negatively impacted, and we may have difficulty obtaining the materials necessary for the production of our products. In addition, the production facilities of our suppliers may be closed for sustained periods of time and industry-wide shipment of products may be negatively impacted, the severity of which may exceed the $1 million in Payroll Protection Program funds received by the Company from the US Federal Government. COVID-19 has also delayed certain strategic transactions the Company intended to close on in the near future and the Company does not know if and when such transactions will be completed.
Note 14 Impairment –
In the first quarter of 2019, the Company identified an impairment indicator related to the goodwill associated with Clever Container. As a result of an impairment test, the Company fully impaired the goodwill related to Clever Container in the first quarter and recorded an impairment charge of $220,000. In the first quarter of 2019, the Company identified an impairment indicator related to the goodwill associated with Flexo. As a result of an impairment test, the Company fully impaired the goodwill related to Flexo in the first quarter of 2019 and recorded an impairment charge of $1,033,000.
Note 15 – Restatement of Financial Statements
As of January 3, 2020, the Audit Committee of the Board approved the engagement of RBSM, LLP (“RBSM”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ended December 31, 2019. This Form 10-Q/A is being prepared with the benefit of auditor review and will constitute our amended filing.
This Form 10-Q/A has also been updated to reflect disclosure of subsequent events that have occurred after the balance sheet date, but before the issuance of the associated financial statements. The subsequent events include the Company’s decision to exit its underperforming international subsidiaries, exit a significant product line, change its capital structure and focus its efforts on its US-based foil balloon and related product offerings.
The Company determined that the deferred tax asset at March 31, 2019 should have been $135,094 and, therefore, the Company should have recorded a valuation allowance on the income tax benefit of $360,492 generated during the quarter.
Finally, the Company determined that the goodwill associated with Clever Container and Flexo should be impaired and recorded an impairment charge of $1.2M.
The change in the statement in equity was related to the increase in net loss of $1.6 million and the corresponding decrease in stockholders’ equity and period end.
Yunhong CTI, LTD (f/k/a CTI Industries Corporation)
|
Condensed Consolidated Balance Sheets
|
|
|
March 31, 2019
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (VIE $3,000 and $57,000, respectively)
|
|
$
|
175,442
|
|
|
$
|
-
|
|
|
$
|
175,442
|
|
Accounts receivable, (less allowance for doubtful accounts of $524,000 and $85,000, respectively)
|
|
|
10,602,710
|
|
|
|
(432,454
|
)
|
|
|
10,170,256
|
|
Inventories, net (VIE $315,000 and $340,000, respectively)
|
|
|
20,837,907
|
|
|
|
|
|
|
|
20,837,907
|
|
Prepaid expenses (VIE $106,000 and $127,000, respectively)
|
|
|
646,164
|
|
|
|
12,000
|
|
|
|
658,164
|
|
Other current assets
|
|
|
1,419,371
|
|
|
|
(12,000)
|
|
|
|
1,407,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
33,681,594
|
|
|
|
(432,454
|
)
|
|
|
33,249,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
23,842,559
|
|
|
|
|
|
|
|
23,842,559
|
|
Building
|
|
|
3,374,334
|
|
|
|
|
|
|
|
3,374,334
|
|
Office furniture and equipment (VIE $303,000 and $303,000, respectively)
|
|
|
2,656,519
|
|
|
|
|
|
|
|
2,656,519
|
|
Intellectual property
|
|
|
783,179
|
|
|
|
|
|
|
|
783,179
|
|
Land
|
|
|
250,000
|
|
|
|
|
|
|
|
250,000
|
|
Leasehold improvements
|
|
|
411,426
|
|
|
|
|
|
|
|
411,426
|
|
Fixtures and equipment at customer locations
|
|
|
518,450
|
|
|
|
|
|
|
|
518,450
|
|
Projects under construction
|
|
|
188,181
|
|
|
|
|
|
|
|
188,181
|
|
|
|
|
32,024,648
|
|
|
|
|
|
|
|
32,024,648
|
|
Less : accumulated depreciation and amortization (VIE $106,000 and $104,000, respectively)
|
|
|
(28,427,729
|
)
|
|
|
|
|
|
|
(28,427,729
|
)
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
|
3,596,919
|
|
|
|
|
|
|
|
3,596,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill (VIE $0 and $440,000, respectively)
|
|
|
1,473,176
|
|
|
|
(1,473,176
|
)
|
|
|
0
|
|
Net deferred income tax asset
|
|
|
495,586
|
|
|
|
(360,492
|
)
|
|
|
135,094
|
|
Operating lease right-of-use
|
|
|
2,110,723
|
|
|
|
367,094
|
|
|
|
2,477,817
|
|
Other assets
|
|
|
26,088
|
|
|
|
220,000
|
|
|
|
246,088
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total other assets
|
|
|
4,105,573
|
|
|
|
(1,246,574
|
)
|
|
|
2,858,999
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
41,384,086
|
|
|
$
|
(1,679,028
|
)
|
|
$
|
39,705,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Checks written in excess of bank balance (VIE $4,000 and $7,000, respectively)
|
|
$
|
654,646
|
|
|
|
|
|
|
$
|
654,646
|
|
Trade payables (VIE $142,000 and $62,000, respectively)
|
|
|
8,680,004
|
|
|
|
|
|
|
|
8,680,004
|
|
Line of credit (VIE $249,000 and $267,000, respectively)
|
|
|
15,351,709
|
|
|
|
|
|
|
|
15,351,709
|
|
Notes payable - current portion
|
|
|
4,414,581
|
|
|
|
|
|
|
|
4,414,581
|
|
Notes payable affiliates - current portion
|
|
|
11,271
|
|
|
|
|
|
|
|
11,271
|
|
Operating Lease Liabilities
|
|
|
1,016,687
|
|
|
|
284,140
|
|
|
|
1,300,827
|
|
Accrued liabilities (VIE $47,000 and $89,000, respectively)
|
|
|
2,082,161
|
|
|
|
(432,454
|
)
|
|
|
1,649,707
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total current liabilities
|
|
|
32,211,059
|
|
|
|
(148,314
|
)
|
|
|
32,062,745
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Notes payable - affiliates
|
|
|
175,512
|
|
|
|
|
|
|
|
175,512
|
|
Notes payable, net of current portion (VIE $30,000 and $27,000, respectively)
|
|
|
639,327
|
|
|
|
|
|
|
|
639,327
|
|
Operating Lease Liabilities
|
|
|
1,094,036
|
|
|
|
82,954
|
|
|
|
1,176,990
|
|
Notes payable - officers, subordinated
|
|
|
1,012,024
|
|
|
|
-
|
|
|
|
1,012,024
|
|
Deferred gain (non current)
|
|
|
74,364
|
|
|
|
-
|
|
|
|
74,364
|
|
Total long-term debt, net of current portion
|
|
|
2,995,263
|
|
|
|
82,954
|
|
|
|
3,078,217
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total liabilities
|
|
|
35,206,322
|
|
|
|
(65,360)
|
|
|
|
35,140,962
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Yunhong CTI, LTD stockholders' equity:
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Preferred Stock -- no par value, 3,000,000 shares authorized, 0 shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock - no par value, 15,000,000 shares authorized, 3,779,608 shares issued and 3,730,950 shares outstanding
|
|
|
13,898,494
|
|
|
|
|
|
|
|
13,898,494
|
|
Paid-in-capital
|
|
|
3,135,404
|
|
|
|
|
|
|
|
3,135,404
|
|
Accumulated earnings
|
|
|
(3,745,907
|
)
|
|
|
(1,613,668
|
)
|
|
|
(5,359,575
|
)
|
Accumulated other comprehensive loss
|
|
|
(5,814,471
|
)
|
|
|
|
|
|
|
(5,814,471
|
)
|
Less: Treasury stock, 43,658 shares
|
|
|
(160,784
|
)
|
|
|
|
|
|
|
(160,784
|
)
|
Total Yunhong CTI, LTD stockholders' equity
|
|
|
7,312,736
|
|
|
|
(1,613,668
|
)
|
|
|
5,699,068
|
|
Noncontrolling interest
|
|
|
(1,134,972
|
)
|
|
|
|
|
|
|
(1,134,972
|
)
|
Total Equity
|
|
|
6,177,764
|
|
|
|
(1,613,668
|
)
|
|
|
4,564,096
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
41,384,086
|
|
|
$
|
(1,679,028
|
)
|
|
$
|
39,705,058
|
|
Yunhong CTI, LTD (f/k/a CTI Industries Corporation)
|
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
|
|
|
|
2019
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Net Sales
|
|
$
|
12,536,389
|
|
|
$
|
-
|
|
|
$
|
12,536,389
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cost of Sales
|
|
|
10,540,218
|
|
|
|
-
|
|
|
|
10,540,218
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Gross profit
|
|
|
1,996,171
|
|
|
|
-
|
|
|
|
1,996,171
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
-
|
|
|
|
|
|
General and administrative
|
|
|
2,056,073
|
|
|
|
(214,175)
|
|
|
|
1,841,898
|
|
Selling
|
|
|
437,565
|
|
|
|
-
|
|
|
|
437,565
|
|
Advertising and marketing
|
|
|
273,880
|
|
|
|
(101,303)
|
|
|
|
172,577
|
|
Impairment on long-lived assets
|
|
|
|
|
|
|
1,253,176
|
|
|
|
1,253,176
|
|
Gain on sale of assets
|
|
|
(23,547
|
)
|
|
|
-
|
|
|
|
(23,547
|
)
|
Total operating expenses
|
|
|
2,743,971
|
|
|
|
937,698
|
|
|
|
3,681,669
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Loss from operations
|
|
|
(747,800
|
)
|
|
|
(937,698
|
)
|
|
|
(1,685,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(546,906
|
)
|
|
|
-
|
|
|
|
(546,906
|
)
|
Other income (expense)
|
|
|
|
|
|
|
(315,478)
|
|
|
|
(315,478)
|
|
Foreign currency loss
|
|
|
(8,594
|
)
|
|
|
-
|
|
|
|
(8,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(555,500
|
)
|
|
|
(315,478)
|
|
|
|
(870,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before taxes
|
|
|
(1,303,300
|
)
|
|
|
(1,253,176
|
)
|
|
|
(2,556,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
|
(360,491
|
)
|
|
|
360,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(942,809
|
)
|
|
|
(1,613,667
|
)
|
|
|
(2,556,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: loss attributable to noncontrolling interest
|
|
|
(62,388
|
)
|
|
|
-
|
|
|
|
(62,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Yunhong CTI, LTD
|
|
$
|
(880,421
|
)
|
|
$
|
(1,613,667
|
)
|
|
$
|
(2,494,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency adjustment
|
|
|
235,876
|
|
|
|
-
|
|
|
|
235,876
|
|
Comprehensive loss
|
|
$
|
(644,545
|
)
|
|
$
|
(1,613,667
|
)
|
|
$
|
(2,258,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(0.24
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(0.24
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares and equivalent shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,735,950
|
|
|
|
|
|
|
|
3,735,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
3,735,950
|
|
|
|
|
|
|
|
3,735,950
|
|
Yunhong CTI, LTD (f/k/a CTI Industries Corporation)
|
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
|
|
|
|
2019
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(942,809
|
)
|
|
$
|
(1,613,667
|
)
|
|
$
|
(2,556,476
|
)
|
Depreciation and amortization
|
|
|
308,084
|
|
|
|
-
|
|
|
|
308,084
|
|
Operating cash flows from operating leases
|
|
|
248,757
|
|
|
|
(248,757)
|
|
|
|
|
|
Amortization of deferred gain on sale/leaseback
|
|
|
(27,474)
|
|
|
|
|
|
|
|
(27,474
|
)
|
Provision for losses on accounts receivable
|
|
|
6,085
|
|
|
|
|
|
|
|
6,085
|
|
Provision for losses on inventories
|
|
|
(10,656)
|
|
|
|
|
|
|
|
(10,656
|
)
|
Impairment of long-lived assets
|
|
|
|
|
|
|
1,253,176
|
|
|
|
1,253,176
|
|
Deferred income taxes
|
|
|
(360,491
|
)
|
|
|
360,491
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
28,967
|
|
|
|
28,967
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Accounts receivable
|
|
|
249,950
|
|
|
|
410,349
|
|
|
|
660,299
|
|
Inventories
|
|
|
(827,084
|
)
|
|
|
-
|
|
|
|
(827,084
|
)
|
Prepaid expenses and other assets
|
|
|
(235,701
|
)
|
|
|
215,468
|
|
|
|
(20,233
|
)
|
Trade payables
|
|
|
1,971,593
|
|
|
|
28,741
|
|
|
|
2,000,334
|
|
Accrued liabilities
|
|
|
(149,957
|
)
|
|
|
|
|
|
|
(149,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
230,297
|
|
|
|
434,768
|
|
|
|
665,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(52,243
|
)
|
|
|
|
|
|
|
(52,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(52,243
|
)
|
|
|
|
|
|
|
(52,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in checks written in excess of bank balance
|
|
|
18,504
|
|
|
|
|
|
|
|
18,504
|
|
Net change in revolving line of credit
|
|
|
(1,235,126
|
)
|
|
|
|
|
|
|
(1,235,126
|
)
|
Repayment of long-term debt
|
|
|
771,113
|
|
|
|
(984,634)
|
|
|
|
(213,521)
|
|
Proceeds from issuance of stock
|
|
|
28,967
|
|
|
|
(28,967)
|
|
|
|
-
|
|
Cash paid for deferred financing fees
|
|
|
3,800
|
|
|
|
(31,385)
|
|
|
|
(27,585)
|
|
Proceeds from issuance of long-term note payable
|
|
|
|
|
|
|
650,000
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(412,742
|
)
|
|
|
(394,986)
|
|
|
|
(807,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(18,020)
|
|
|
|
(39,782)
|
|
|
|
(57,802)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
(252,708
|
)
|
|
|
|
|
|
|
(252,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
428,150
|
|
|
|
|
|
|
|
428,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
175,442
|
|
|
$
|
|
|
|
$
|
175,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
366,688
|
|
|
|
|
|
|
$
|
366,688
|
|
Common stock issued for notes payable
|
|
|
|
|
|
|
|
|
|
$
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This quarterly report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this quarterly report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly report to conform such statements to actual results or to changes in our opinions or expectations.
Overview
We produce film products for novelty, packaging and container applications. These products include foil balloons, latex balloons and related products, films for packaging and custom product applications, and flexible containers for packaging and consumer storage applications. We produce all of our film products for packaging, container applications and most of our foil balloons at our plant in Lake Barrington, Illinois. We produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. Substantially all of our film products for packaging and custom product applications are sold to customers in the United States. We market and sell our novelty items and flexible containers for consumer use in the United States, Mexico, Latin America, and Europe. We also market and sell vacuum sealing machines, home organizing and container products, Candy Blossoms and party goods.
As of January 1, 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606.
We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
As of January 1, 2019, we adopted ASC Topic 842, Leases (“ASC Topic 842”). Refer to Note 12 for additional information. Our primary leases relate to the facilities we use in Lake Zurich, IL (USA), Mexico, Germany and the UK. We also have ancillary leases for items ranging from forklifts to printers. The majority of our leases are classified as operating lease right-of-use (“ROU”) assets and related operating lease liabilities. Finance leases are included in property and equipment and related liabilities. ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at the commencement date for leases that exceed 12 months. The expected lease term includes options to renew when it is reasonably certain that we will exercise such option.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in the cost of sales or sales, general and administrative expense areas. Finance leases are amortized on a straight-line basis and included in similar areas of expense classification. Variable lease payments, short-term rentals (leases less than 12 months in duration) are expensed as incurred.
Summary of Subsequent Events
In July of 2019 management and the Board engaged in a review of the Company’s international subsidiaries and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the board authorized management to divest of all international subsidiaries. The Company divested its United Kingdom subsidiary in the fourth quarter 2019 and expects to divest its European (German) subsidiary in the first half of 2020. The operations of these entities will be presented as discontinued operations in the third quarter 2019, the period in which they met the accounting criteria for discontinued operations. These actions are being taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based in the United States. In October 2019, we determined that we would not renew our Trademark License Agreement with SC Johnson when it expired on December 31, 2019. Under this Agreement, we were licensed to manufacture and sell a line of vacuum sealing machines and pouches under the Ziploc® Brand Vacuum Sealer System. The terms of the Agreement included a run-off provision which allowed us to sell products under the Ziploc® trademark for 90 days after the end of the Agreement. For the three months ended March 31, 2019, we had revenue of $2.2 million associated with products which utilized the Ziploc® trademark. Our exit of the Ziploc® product line is considered a strategic shift and will have a major effect on our operations and financial results on a go forward basis. However, as we continued to utilize the Ziploc® related assets in 2020, those assets will not be considered abandoned until they cease to be used at the end of the first quarter of 2020. Therefore, our Ziploc® operations cannot be classified as discontinued operations in these financial statements but will be presented as discontinued operations when all of the applicable accounting criteria are met. We have also dramatically changed our capital structure. On January 3, 2020 we entered into a securities purchase agreement, as amended on February 24, 2020 and April 13, 2020, (the “LF Purchase Agreement”) with LF International Pte., a Singapore private limited company (the “LF International”), which is controlled by Company director Mr. Yubao Li, pursuant to which the Company agreed to issue and sell, and LF International agreed to purchase, up to 500,000 shares of the Company’s newly created Series A Convertible Preferred Stock (“Series A Preferred”), with each share of Series A Preferred initially convertible into ten shares of the Company’s common stock, at a purchase price of $10.00 per share, for aggregate gross proceeds of $5,000,000 (the “LF International Offering”). As a result of the LF International Offering, a change of control of the Company may occur. As permitted by the LF Purchase Agreement, the Company may, in its discretion issue up to an additional 200,000 shares of Series A Preferred for a purchase price of $10.00 per share to additional investors (the “Additional Shares Offering,” and collectively with the LF International Offering, the “Offering”). On January 13, 2020, the Company conducted its first closing of the LF International Offering, resulting in aggregate gross proceeds of $2,500,000. Pursuant to the LF Purchase Agreement, LF International received the right to nominate and elect one member to the Company’s board of directors (subject to certain adjustments), effective as of the first closing, as well as a second director by the earlier of (i) the Company’s upcoming 2020 annual meeting of shareholders and (ii) May 15, 2020 and a third director by the Company’s upcoming 2020 annual meeting of shareholders. Pursuant to LF International’s nomination, effective January 13, 2020, the Board appointed Mr. Yubao Li as a director of the Company. Additionally, pursuant to the LF Purchase Agreement, on March 12, 2020, the Company changed its name to Yunhong CTI Ltd. To date, the Company has sold 492,660 shares of Series A Preferred to LF International and other accredited investors for aggregate gross proceeds of $4,926,600. Additionally, on April 1, 2020, an investor converted an accounts receivable of $482,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred.
Results of Operations
Net Sales. For the three months ended March 31, 2019, net sales were $12,536,000 compared to net sales of $13,979,000 for the same period of 2018, a decrease of 10%. For the quarters ended March 31, 2019 and 2018, net sales by product category were as follows:
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Product Category
|
|
$
(000) Omitted
|
|
|
% of
Net Sales
|
|
|
$
(000) Omitted
|
|
|
% of
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foil Balloons
|
|
|
6,482
|
|
|
|
52%
|
|
|
|
7,766
|
|
|
|
56%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latex Balloons
|
|
|
1,987
|
|
|
|
16%
|
|
|
|
2,149
|
|
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacuum Sealing Products
|
|
|
2,152
|
|
|
|
17%
|
|
|
|
1,589
|
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film Products
|
|
|
762
|
|
|
|
6%
|
|
|
|
438
|
|
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Sales
|
|
|
1,153
|
|
|
|
9%
|
|
|
|
2,037
|
|
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,536
|
|
|
|
100%
|
|
|
|
13,979
|
|
|
|
100%
|
|
Foil Balloons. During the three months ended March 31, 2019, revenues from the sale of foil balloons decreased by 17% compared to the prior year period from $7,766,000 to $6,482,000. Sales to our largest balloon customer decreased from $4,450,000 in the first quarter of 2018 to $3,861,000 in the first quarter of 2019. As we and others in the industry have reported, the supply of helium has declined and pricing has increased. We expect the helium market to improve during the next twelve months, but remains a negative factor in the sale of helium-based products such as many foil balloons.
Latex Balloons. During the three months ended March 31, 2019, revenues from the sale of latex balloons decreased by 8% compared to the prior year period, from $2,149,000 to $1,987,000.
Vacuum Sealing Products. During the three months ended March 31, 2019, revenues from the sale of pouches and vacuum sealing machines increased by 35% compared to the prior year, from $1,589,000 to $2,152,000. The new, smaller format machine introduced late during 2018 has sold well, and customers have largely accepted the cost pass-throughs related to tariffs.
Films. During the three months ended March 31, 2019, revenues from the sale of laminated film products increased 74% compared to the prior year period from $438,000 to $762,000.
Other Revenues. During the three months ended March 31, 2019, revenues from the sale of various other products decreased by 43% to $1,153,000 compared to revenues from other products in the same period in 2018 of $2,037,000. The revenues from the sale of other products during the first quarter of 2019 include (i) sales of a line of “Candy Blossoms” and similar products consisting of candy and small inflated balloons sold in small containers in the amount of $67,000, (ii) the sale of accessories and supply items related to balloon products, (iii) sales by Clever Container Company, L.L.C. which engages in the direct sale of container and organizing products through a network of independent distributors in the amount of $161,000 and (iv) sales of party goods in Mexico by Flexo Universal in the amount of $341,000. Total Candy Blossom revenue is expected to increase during the twelve months ending December 31, 2019, as compared to the same period of 2018, but substantial initial shipments began during April of 2019, as opposed to March of 2018. Additionally, Clever Container changed its business model to one of both lower costs and revenues compared to its prior business model, reducing the revenues shown in Other Revenues. This business is expected to be divested during 2019.
Sales to a limited number of customers continue to represent a large percentage of our net sales. The table below illustrates the impact on sales of our top three and ten customers for the three months ended March 31, 2019 and 2018.
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Three Months Ended March 31,
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% of Sales
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2019
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2018
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|
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|
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|
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Top 3 Customers
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55
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%
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54
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%
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|
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|
|
|
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Top 10 Customers
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73
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%
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70
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%
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During the three months ended March 31, 2019, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customers for the three months ended March 31, 2019 were $3,861,000 or 31%, and $2,159,000 or 17%, of consolidated net sales, respectively. Sales to these customers for the three months ended March 31, 2018 were $4,450,000 or 32%, and $2,471,000 or 18%, of consolidated net sales, respectively. The amounts owed at March 31, 2019 by these customers were $2,933,000 or 29%, and $2,279,000 or 22%, of the Company’s consolidated net accounts receivable, respectively. As of March 31, 2018, the total amounts owed to the Company by these customers were $3,643,000 or 33%, and $2,657,000 or 24% of the Company’s consolidated net accounts receivable, respectively.
Cost of Sales. During the three months ended March 31, 2019, the cost of sales was $10,540,000, a 5% decrease from $11,111,000 for the three months ended March 31, 2018. The reduction in cost of sales was largely due to lower sales volume, net of related inefficiencies.
General and Administrative. During the three months ended March 31, 2019, general and administrative expenses were $1,842,000, as compared to $1,884,000 for the same period in 2018. A one-time fee associated with the forbearance agreement in the amount of $250,000 was included in the first three months of 2019 general and administrative expenses.
Selling, Advertising and Marketing. During the three months ended March 31, 2019, selling, advertising and marketing expenses were $610,000, a 47% decrease compared to $1,155,000 for the same period in 2018. This reduction was primarily due to the full year benefit of cost reduction programs implemented during the past year.
Other Operating Expense. The Company recognized a $1,253,000 impairment charge on our long-lived assets during March 2019 as we identified an impairment indicator related to goodwill associated with Clever Container and Flexo. As a result of the impairment test, the Company fully impaired the goodwill.
Other Income (Expense). During the three months ended March 31, 2019, the Company incurred interest expense of $546,000, compared to interest expense during the same period of 2018 in the amount of $564,000.
For the three months ended March 31, 2019, the Company had a foreign currency transaction loss of $9,000 compared to a foreign currency transaction gain of $31,000 during the same period of 2018.
Financial Condition, Liquidity and Capital Resources
Cash Flow Items.
Operating Activities. During the three months ended March 31, 2019, net cash provided by operations was $665,000, compared to net cash used by operations during the three months ended March 31, 2018 of $899,000.
Significant changes in working capital items during the three months ended March 31, 2019 included:
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A decrease in accounts receivable of $660,000 compared to an increase in accounts receivable of $466,000 in the same period of 2018.
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An increase in inventory of $827,000 compared to an increase in inventory of $1,995,000 in 2018.
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An increase in trade payables of $2,000,000 compared to an increase in trade payables of $1,573,000 in 2018.
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An decrease in accrued liabilities of $150,000 compared to an increase in accrued liabilities of $127,000 in 2018.
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Investing Activity. During the three months ended March 31, 2019, cash used in investing activity was $52,000, compared to cash provided by investing activity for the same period of 2018 in the amount of $64,000.
Financing Activities. During the three months ended March 31, 2019, cash used in financing activities was $808,000 compared to cash provided by financing activities for the same period of 2018 in the amount of $1,223,000. Financing activity consisted principally of changes in the balances of revolving and long-term debt.
Liquidity and Capital Resources.
At March 31, 2019, the Company had cash balances of $175,000 compared to cash balances of $596,000 for the same period of 2018.
Also, at March 31, 2019, the Company had a working capital balance of $1,186,000 compared to a working capital balance of $2,802,000 on December 31, 2018.
As of March 31, 2019, the Company was not in compliance with its credit facility, operating under a forbearance agreement. For this reason, $3.3 million of long-term debt was reclassified as current debt as of March 31, 2019. Failure to ultimately regain compliance with the terms of our credit agreement, or enter into a suitable replacement financing vehicle, could negatively impact our ability to carry on our business up to and including our ability to continue as a going concern. Additionally, we have encountered difficulties with seasonal cash flow needs, including increased costs associated with recruiting and retaining workers in the Chicago area. The failure to properly manage seasonal cash needs could put a strain on the Company, up to and including our ability to continue as a going concern. See Note 2 for additional discussion.
Seasonality
In the foil balloon product line, sales have historically been seasonal with approximately 40% occurring in the period from December through March of the succeeding year and 24% being generated in the period July through October in recent years. Vacuum sealing product sales are also seasonal; approximately 60% of sales in this product line occur in the period from July through December.
Critical Accounting Policies
Please see pages 24-27 of our Annual Report on Form 10-K for the year ended December 31, 2018 for a description of policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. Except for the adoption of ASC Topic 842 (Leases) as described herein, no material changes to such information have occurred during the three months ended March 31, 2019.